Back in June, Financial-Planning.com put a curious headline on a story: “NAPFA Faces Member Loss After Fee-Only Rule Change.” You may remember that the rule change in question ended NAPFA’s allowing its fee-only members to own up to 2% of commission-charging financial services businesses.
Simply put, NAPFA tightened its definition of fee-only, and when a professional organization tightens its standards—particularly in a major way, such as this change—it would seem to be a foregone conclusion that it will lose some members: those professionals who practiced under the old rule and decline to make the necessary changes to comply with the new rule.
A professional organization is about setting high client-oriented standards that, for many reasons (usually economic, but not necessarily in the NAPFA case), some people don’t want to live up to. The easiest way for any organization to attract more members would be to lower its professional standards, but professional organizations are not popularity contests.
Or at least, they shouldn’t be, which brings me to a white paper written by Knut Rostad, founder and president of the Institute for the Fiduciary Standard. Released in May, “Fiduciary Advisors Must Craft, Uphold and Advocate for Fiduciary Best Practices” is an unusual paper in that it’s a call to action for professional advisors and the organizations that accredit them (including the CFA Institute, AICPA, CFP Board, fi360, CEFEX, Paladin and 3Ethos) to come together in a “Best Practices Board” to create a single set of professional practice standards for fiduciary financial advisors. The paper makes a powerful case for why such a standard is necessary—and how the future of independent financial advice may depend on it.
Rostad’s case for the urgency of those best practices rests on the current distrust of Wall Street, which buckets of research shows has spilled over to brokers and independent financial advisors. For instance, he cited the Harris Reputation Quotient Survey, which has measured confidence in Wall Street for 23 years and found in 2012 that some “51% of respondents had very little or no confidence in the financial industry.” While 28% agree that “people on Wall Street are as honest and moral as other people,” 70% think “most people on Wall Street would be willing to break the law if they believed they could make a lot of money and get away with it.”
I suspect many independent advisors believe that the widespread erosion of Wall Street’s public reputation since the 2008 mortgage meltdown has been a boost to their business, and in some ways it has. Certainly, the independent community has gained some new clients defecting from brokers’ books of business. However, at the same time, the flood of breakaway brokers joining the independent ranks—all too often without the traditional independent client-centered ethos—can’t help but reduce independent advisors’ anti-Wall Street reputation.
Rostad offered some evidence to support this view: “In State Street’s 2013 Forgotten Investor Survey, according to InvestmentNews, just 15% of respondents reported trusting their advisor. Industry consultant Chip Roame has a more ominous view. He says the public believes ‘the whole industry is evil…you are lumped in with Madoff.’”
Additionally, I suspect the dramatic growth in assets managed by fledgling robo-advisors suggests that today’s younger Gen X and millennials don’t distinguish between Wall Street brokers and independents the way baby boomers did and still do.